UPDATE: Oct. 28, 2021: Baxter's plan to acquire Hillrom in an all-cash deal valued at $10.5 billion appears on track. CEO Joe Almeida told investors during Thursday's third-quarter earnings call that the Hart-Scott-Rodino Act waiting period in the U.S. expired with no issuance of a second information request from the Federal Trade Commission.
While FTC reserves its right to take further action in reviewing such acquisitions, Almeida called the waiting period expiration a "key milestone" on the road to closing the deal, which is anticipated in early 2022. Other global regulatory approvals are still needed and a Dec. 2 Hillrom shareholder meeting is scheduled to vote on the transaction — the largest medtech merger so far in 2021 — but the deal is expected to go as planned.
In the meantime, Baxter and Hillrom have created an integration management office to help combine the two companies, which Almeida said will bring together complimentary portfolios. Baxter's decision to buy Hillrom is an effort to expand into connected care and offer digital health products across the continuum of care.
However, analysts initially questioned the price and strategic fit of a Baxter-Hillrom deal. Evercore ISI analysts last month said the two companies "need to do work" on the integration of Baxter's infusion pump business with Hillrom's digital health products.
Asked on Thursday's earnings call what might be underappreciated by investors about the acquisition, Almeida said Wall Street "has missed" what Hillrom has done in the last two to three years "in terms of connecting their products and going into some very specific markets, primarily frontline care, and also the evolution of what used to be just a hospital bed or a capital purchase by the hospital to being a part of an ecosystem that goes from patient safety to patient diagnostics."
Dive Brief:
- Baxter announced Thursday it will acquire Hillrom in an all-cash deal valued at $10.5 billion or $156 per Hillrom share. CEO Joe Almeida told investors Baxter's decision to buy Hillrom was an effort to "augment and optimize" its connected care portfolio.
- The announcement confirmed recent media reports that the two companies were in talks. Hillrom reportedly rejected an earlier offer of $144 per share. The final per share transaction represents a 26% premium to Hillrom's closing stock price on July 27, the last trading day prior to the first report by the press on discussions between the two medtechs.
- The deal is expected to close by early 2022 and to generate high single-digit return on invested capital for Baxter by year five. However, Evercore ISI analysts in a Thursday note called that estimate "a tad conservative — we think BAX could hit ~7% ROI by year 3."
Dive Insight:
Baxter's acquisition of Hillrom ends weeks of media reports about talks between the two companies, including Sunday's article in The Wall Street Journal which at the time valued the deal at around $10 billion or $150 a share.
Wall Street was initially less than enthused by prospects of a union, though some analysts have tweaked their takes. Investors were more enthused on Thursday, sending shares of both companies up by single digits in late morning trading.
Ultimately, Baxter agreed to buy Hillrom for a total enterprise value of about $12.4 billion, including debt.
Baxter will finance the deal with a combination of cash and fully committed debt financing. "We are assuming around 3% in terms of overall financing costs. We set up a structure which allows for rapid pay down," CFO Jay Saccaro told investors Thursday.
Almeida said that while Baxter "likes" its current businesses, it concluded acquiring Hillrom would allow it to expand into digital and connected care products.
"We want to go where the puck is going, not where the puck is today," Almeida said. "We had found that digital health with the acceleration of COVID has become a really big focus for us."
The Hillrom buy will enable Baxter to offer connected care products across the continuum of care, including hospitals and at-home settings, according to Almeida, who contends that the acquisition will accelerate revenues.
Baxter expects the deal to result in about $250 million of annual pre-tax cost synergies by the end of year three.
Evercore ISI analysts in a Thursday note acknowledged that Hillrom's connected care products might have synergies with Baxter's infusion pump business. But when it comes to commenting on the integration of pumps and Hillrom digital health products, they will "need to do work on this topic."
At the same time, Evercore ISI concluded that "while investors had debated on whether BAX had overlap with HRC, the cost synergy est (of ~8% of revs is inline w/historical Medtech deals) should allay concerns."
Due to J.P. Morgan's involvement in the deal, the firm suspended coverage of Baxter. However, bank analysts earlier in the week said they did not see an overwhelming strategic benefit and noted Hillrom's 2% to 3% weighted average market growth rate is "below Baxter's at ~3-4%."
Nonetheless, Almeida insisted on Thursday's investors call that Hillrom's WAMGR "is higher than ours going forward, so it's a positive for the company overall."
Baxter postponed its analyst day scheduled for Sept. 20 until after the deal to buy Hillrom is complete.
In the meantime, Baxter has issued "long-term financial guidance as a standalone entity" and expects sales to grow 4% to 5%, compounded annually from 2021 to 2024 based on current foreign exchange rates.
"Over this period, Baxter anticipates expanding its adjusted operating margin by 300 basis points or more. On an adjusted basis, Baxter expects to deliver earnings growth of low double digits compounded annually over the same period," the company said in Thursday's announcement.
Baird analyst Mike Polark in a note wrote that these ranges reflect the Street view, but "seem to place current sell-side modeling at the upper end." Evercore ISI analysts noted projected sales growth of 4% to 5% compounding annually from 2021 to 2024 compares to Baxter's 2018 expectations accelerating to the 5% to 6% range.
